One Year Later, Another Look at Obamanomics vs. Reaganomics
On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.
Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.
But perhaps that was an unfair comparison. 
Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.
So let’s look at the same charts, but add an extra year of data. Does it make a difference?
Meh… not so much.
Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed. Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.
A Remembrance of William Niskanen
I first met Bill when I went to the Council of Economic Advisers in mid-1982. Bill had come to the CEA in the spring of 1981 as one of the early appointees of the incoming Reagan administration. He had known the president and worked with him when he was governor of California.
Bill and I quickly became good friends. Whenever we were both in Washington, we would usually start the day with 20 minutes of chewing over what was going on in the economy and in public policy. Part of the bond that developed between us was a consequence of the unrelenting infighting within the administration. The infighting sometimes involved the CEA but Bill and I, most of the time, were able to stand clear and remain in neutral territory.
Of course, Bill understood how bureaucracies work, or failed to work, from both his research and his experience at Rand, Ford, OMB and, yes, at UCLA and Berkeley. His insights were a staple of our conversations both at the CEA and later. Very few scholars have such first-hand experience in these various sectors of the economy. That fact often shows in the work of academics who have policy ideas that are simply untenable in the context of how organizations and the political system actually work.
A wonderful sense of humor lubricated Bill’s interactions with others. Well, most of the time anyway. During the administration’s work that culminated in the Tax Reform Act of 1986, Bill cracked along the way that the Treasury proposal was one that Walter Mondale would be proud of. I had left the CEA and returned to Brown University by that time, but Bill’s crack so angered Treasury Secretary Don Regan (who was not renowned for a sense of humor) that Regan vetoed Bill’s path to become chairman of the CEA. He served as acting chairman for a short time and then joined Cato.
Bill was the most widely read person I have known. That, plus the breadth of his personal experience, made him a delightful conversationalist on almost any topic in almost any group.
Although it was a big loss to the Reagan administration for Bill to depart, it was a huge gain for Cato and for the nation for him to join Cato. His leadership there, working closely with Ed Crane, built Cato to what it is today—the premier libertarian think tank in the world. Bill’s scholarly work will influence future generations; so also, in equal or greater measure, will the Cato Institute that he helped to build.
Bush Was Not a Conservative
There’s an interesting debate in the blogosphere about whether President George W. Bush was a conservative. Here’s a good summary of the discussion, along with lots of links. (I especially like this analysis since it cites my work.)
I’ve already explained that Bush was a statist rather than a conservative, and you can find additional commentary from me here, here, here, and here.
Simply stated, any president who doubles the burden of federal spending in just eight years is disqualified from being a conservative — unless the term is stripped of any meaning and conservatives no longer care about limited government and constitutional constraints on Washington.
But if you don’t want to read the blog posts I linked above, this chart should make clear that Bush was a big spender, not only when compared to Reagan, but also compared to Clinton. Moreover, we’re only looking at overall domestic spending, so this doesn’t include Iraq, Afghanistan, and other defense expenditures. And these are inflation-adjusted dollars, so we’re comparing apples to apples.
Spending Restraint Works: Examples from Around the World
America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.
For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.
But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.
To Fix the Budget, Bring Back Reagan…or Even Clinton
President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.
But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.
Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.
Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.
Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.
Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.
Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending — largely because of rapid increases in domestic spending.
This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.
Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.
Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.
Comparing Reaganomics and Obamanomics
Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).
The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.
The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.
The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.
The Tea Party and Foreign Policy
There has been an on-going discussion recently about the Tea Party’s foreign policy views and how this might influence the upcoming election and new members of Congress. In an essay at the Daily Caller last week, the Heritage Foundation’s Jim Carafano addressed this question and the claim that the new “Defending Defense” initiative— led by Heritiage, AEI, and the Foreign Policy Initiative—is aimed at co-opting the Tea Party movement (for more on the substance, or lack thereof, of “Defending Defense,” see Justin Logan’s response here).
Over at The Skeptics blog, I take issue with Carafano’s assessment of the Tea Party’s foreign policy views:
With respect to Carafano’s assessment of the Tea Partiers’s views on foreign policy and military spending, most of what he puts forward is pure speculation. Little is actually known about the foreign policy views of a movement that is organized primarily around the idea of getting the government off the people’s backs. It seems unlikely, however, that a majority within the movement like the idea of our government building other people’s countries, and our troops fighting other people’s wars.
Equally dubious is Carafano’s claim that the Tea Party ranks include “many libertarians who don’t think much of the Reagan mantra ‘peace through strength’” but an equal or larger number who are enamored of the idea that the military should get as much money as it wants, and then some. Carafano avoids a discussion of what this military has actually been asked to do, much less what it should do. By default, he endorses the tired status quo, which holds that the purpose of the U.S. military is to defend other countries so that their governments can spend money on social welfare programs and six-week vacations.
Tea Partiers are many things, but defenders of the status quo isn’t one of them. This movement is populated by individuals who are incensed by politicians reaching into their pockets and funneling money for goo-goo projects to Washington. It beggars the imagination that they’d be anxious to send money for similar schemes to Brussels, Paris, Berlin and Tokyo, and yet that is precisely what our foreign policies have done — and will do — so long as the United States maintains a military geared more for defending others than for defending us.
Click here to read the entire post.
Or a Program That Was Actually Going to Work
John Judis writes in the New Republic that Obama hasn’t been as successful at selling his economic program as Reagan was:
On the eve of the [1982] election, with the unemployment rate at a postwar high, a New York Times/CBS News poll found that 60 percent of likely voters thought Reagan’s economic program would eventually help the country. That’s a sign of a successful political operation.
When Keynesians Attack, Part II
I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.
Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”
This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.
But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.
When Keynesians Attack
If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic‘s site.
At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.
The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).
But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:
(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.
When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.
Responding to Paul Krugman and Ezra Klein
I seem to have touched a raw nerve with my post earlier today on my International Liberty blog, comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.
That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with a financial crisis?
I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.
What Would Reagan Do on Immigration?
Former Reagan speechwriter Peter Robinson tries to answer that very good question in an op-ed in today’s Wall Street Journal. It’s a question my conservative Republican friends should ask themselves as the party tries, once again, to turn public opposition to illegal immigration into political success at the polls.
Robinson correctly observes that Reagan would have had nothing to do with the anger and inflamed rhetoric that so often marks the immigration debate today. “Ronald Reagan was no kind of nativist,” he concludes, noting that Reagan was always reaching out to voters beyond the traditional Republican base, including the fast-growing Hispanic population.
It’s worth remembering that Reagan signed the 1986 Immigration Reform and Control Act (IRCA), which opened the door to citizenship for nearly 3 million people who had been living in the country illegally. Robinson is confident Reagan would have supported the kind of comprehensive immigration reform championed by President George W. Bush and approved by the Senate in 2006.
For the record, I made similar observations and included a few of the same Reagan quotes in an op-ed I wrote soon after Reagan’s passing in June 2004
My only quibble with Robinson is his assertion that Reagan would have insisted that we successfully enforce the current immigration law first before contemplating any changes. It’s true that the 1986 IRCA contained new enforcement measures and launched an exponential rise in spending on border enforcement. But by all accounts the 1986 law failed to stem the inflow of illegal immigration.
My hunch is that President Reagan would not have simply favored spending more money on an approach that has so clearly failed to deliver. Although he embraced the conservative label, Reagan was always ready to challenge the status quo and change the law to further his vision of a free society and limited government.
I wish more of the Gipper’s admirers today shared his benevolent attitude toward immigration.
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